In a bid to support the economy, China’s central bank surprised markets for a second time this week by lending at significantly lower rates. The medium-term lending facility operation comes after the central bank cut several benchmark lending rates on Monday and made multiple other major reforms.
On Monday, the one-year loan prime rate (LPR) declined to 3.35 percent from 3.45 percent previously, while the five-year LPR declined to 3.85 percent from 3.95 percent. China’s central bank also said would cut the seven-day reverse repo rate to 1.7 percent from 1.8 percent.
The People’s Bank of China issued 200 billion yuan ($27.5 billion) in one-year loans under its medium-term lending facility operation at 2.30 percent, down 20 basis points from its previous medium-term loan.
Following the announcement, China’s stock market reacted negatively as the lower rate signaled greater deflationary pressures and weakness in consumer demand.
The Hang Seng China Enterprises index declined 1.6 percent, marking losses this month of 5 percent. Sovereign bond yields also declined after the news.
Currently, total outstanding medium-term lending facility loans have reached over 7 trillion yuan, of which 4.68 trillion yuan are set to mature this year. The large amount of maturing loans has raised concerns that the central bank may replace it with a permanent injection of cash via a cut to banks’ reserve requirements.
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